The path to a mortgage isn’t always a straight line. According to Pew Research Center, 12 percent of home-purchase loan applications were denied in 2015. A piece of your financial history could block your mortgage. Here are six common reasons people aren’t approved for a mortgage.
- Your credit score is too low. Pulling your own credit report, also known as a "soft inquiry," doesn't affect your credit score. In fact, regularly checking your credit report is a responsible financial practice. You are entitled by law to one free report from each of the three reporting bureaus every 12 months. Keep in mind that if a lender pulls your score to approve a new credit account, it is a "hard inquiry" and can lower your credit score. You typically have to authorize this process. The most effective way to positively influence your credit score is to pay your debts on time.
- You have too much debt. The sum of your debt payments each month — including your current mortgage — should be less than 35-40 percent of your total monthly income. Your best plan for lowering debt is to make a plan to pay it off. Remember, closing a credit account lowers your available credit — which can raise your debt-to-credit, also known as credit utilization ratio and therefore lower your score, especially if you carry balances on other cards.
- Your loan amount and home appraisal value don’t match. Options include a second appraisal or a different lender. If you buy a home, it should cost no more than 2 to 2.5 times your household income, and ideally your mortgage should be no more than 80% of the home's value to avoid paying mortgage insurance. Consider including in your purchase agreement a contingency clause that allows you to back out if your loan falls through, the home doesn't appraise at its sale price, or you lose your job.
- You’ve applied for too many credit cards. Applying for a mortgage within six months of applying for any other type of credit may influence your credit score. Analyze your situation prior to opening several accounts in succession. Opening too many accounts quickly, and multiple credit inquiries can take points off your credit score, more so for someone with few credit accounts or a short credit history.
- You have spotty employment history or big income shifts. Consistency is key: Lenders usually request at least two years of tax returns so they can meet regulatory guidelines to verify stable employment and income. Before you start your home search, meet with a lender or mortgage broker to determine how much money you are qualified to borrow. Having a pre-qualification letter in-hand offers peace-of-mind to you, the seller, and your real estate agent.
- You don’t have a down payment. Without 3 to 20 percent of the purchase price saved, expect approval snags. The amount you'll need for your down payment will vary depending on the size of home, its location, and the type of mortgage you seek. Some lenders may offer loan programs with low down payment options, but may require mortgage insurance which will increase your total monthly obligation. Discuss your options with your lender.
Your best bet? Thoroughly review your finances, save as much as you can and get pre-qualified before you view the “For Sale” listings.